Budget negotiators looking at military pensions

Can savings from military pensions be part of the solution to avoid deeper cuts from defense next month?

That’s an important question facing House-Senate negotiators as they try to close out a deal this week to avoid another round of sequestration in January and restore some certainty to the appropriations process for the remainder of this Congress.

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The two sides appear close but Democrats are anxious about the level of savings being sought by Republicans from civilian federal workers. Finding some money on the military side of the equation could lessen this burden and make the package more equitable too from a political standpoint.

Indeed, the Pentagon has the greatest stake in some agreement and faces a further $21 billion cut in its 2014 budget if nothing is done. There is a greater recognition too –in Congress and among the Joint Chiefs— that it must come to terms with personnel-related costs, which are eating up more and more of what money remains.

“Forty-four cents of every dollar we spend goes to military personnel,” said House Armed Services Committee Chairman Buck McKeon (R.-Calif.) “You look at Detroit, you look at General Motors, you look at what happens when you build up these costs, but we aren’t doing anything about it in our [defense] bill this year.”

On the retirement front, President Barack Obama’s 2014 budget opened the door for the GOP by proposing to increase what federal employees contribute to their pensions: adjusting the number upward in three increments from .8 percent of pay to 2 percent.

When this was last proposed, Congress instead decided to charge newly-hired workers even more. The administration proposal seeks to impose its earlier plan on those hired before 2013. The estimated savings are about $20 billion over the coming decade.

But $20 billion from federal workers –in what’s anticipated to a very modest budget package—can seem out of proportion. And at a time when many of the same employees have seen their pay frozen—and even cut through furloughs over the past year—there is strong resistance from well-connected Democrats, most especially the Maryland delegation.

The challenge for negotiators is to navigate these waters –and some believe that finding savings from the military side could help.

The Obama budget partially opened the door here as well. But the president tended to focus more on pharmacy fees and premiums charged for TRICARE just as the president did with more Medicare means-testing. But since Democrats have ruled out big Medicare changes—without some concessions by the GOP on taxes—there is a reluctance to go down the TRICARE road now.

That brings the focus back to a military pension system that already represents a huge unfunded liability for the government. And unlike the civilian side, it demands no direct pay deductions from active duty military personnel.

Instead Congress appropriates billions each year to a military personnel line-item knows as “retired pay accrual.” In 2014 this amounts to nearly $16.8 billion for the active duty military –roughly two thirds for enlisted personnel and one third, officers.

That translates into about $12,334 per individual assuming an end-strength of 1.36 million personnel. Put another way, it’s roughly 32 cents on top of every dollar of base pay.

Even so, this doesn’t come close to the $50 billion which the Congressional Budget Office estimates is paid out each year to military retirees and their survivors. And since benefits continue to be a function of pay, critics have long argued that some contribution is warranted given the higher salaries of the all-volunteer force.

A second issue is that the system only benefits those who serve 20 years or more, meaning a fraction of those who serve ever benefit. Historically it is far more likely that officers will collect a pension than enlisted personnel.

The situation is far too complex to be resolved in a short-term budget deal, but if officers alone were asked to contribute 2 percent of their base pay to the retirement system, for example, it could save at least several billion dollars over 10 years.

A second option included in a recent CBO report calls for lengthening the pay period used to calculate a retiree’s annuity. Right now, this is typically based on the three consecutive years of highest earnings for a civilian; 36 months for the military.

CBO estimates that if that were changed to five years on the civilian side and 60 months for the military it could trim the combined pension costs by about $5.5 billion over 10 years. The military would share in this: accounting for about $2.1 billion. And it would appear a greater share of the savings would come from officers and higher-ranked civil servants.